April, 2008

March, 2008

October, 2007

"Come closer, come closer!". The young Arab gestured to us, his teeth flashing white as he beamed and beckoned ... "quick, over here". We pushed forward to see what he offered.

The year was 1966, I was 19 and crew on an old Second World War ship, returning to the UK from Bahrain in the Persian Gulf, via West Africa, the Seychelles and Aden. On this warm and sultry evening the ship waited in line at the Southern entrance to the Suez Canal, it's awning rippling in a gentle breeze. Above the canvas, the night sky pressed in on us, sparkling with stars as though someone had carelessly cast thousands of diamonds across an indigo sheet. As the ship came to a halt, it was surrounded by a swarm of small boats, offering everything from exotic fruit to 'genuine' Rolex watches

The young man, surrounded by sailors and marines, showed off his skills, charming us with his smiles and friendliness. He was quick of wit and even quicker of hand. We could not spot how he did it – card tricks, juggling oranges, smashing treasured possessions with a hammer and then making them reappear, all in one piece. He was good – he had to be with all those barrack-room wits around him – but we just couldn't see how he did it. If you didn't know better you would say it was magic.

So here we are, 43 years later, witnessing another kind of magic, writ large on a global stage. This time the magic is so powerful that most people can't even see it. It is the amazing trick of turning something into nothing and nothing into something!

Over recent decades some very clever people have constructed a shadow financial system. It starts with something real, like a house, a car or a factory, which is given a monetary value. This 'real estate' is used to create a financial instrument – such as a mortgage. Then the mortgage is added together with others to create another, brand new, financial instrument, and then another and another and another ... and so on. The real estate becomes the tiny point of a gigantic, upside down pyramid of unregulated, cyclical contracts. All these instruments are created out of thin air – just a signature is required.

Before you know it, you have, not just billions, but trillions of dollars worth of such instruments bubbling up like an enormous balloon. Just like the balloon, they have only a veneer of substance, and are mostly hot air. Trouble is, when you prick the balloon, air escapes and the balloon collapses. Unfortunately for the public this illusory financial balloon is full of pricks and collapsing rapidly, taking jobs and livelihoods with it.

But here is the clever part. As the balloon wilts and the markets crash, those who have benefited from this massive confidence trick are busy buying up assets in the real economy – homes, property factories etc, all at real knock down prices. These few are converting their illusory financial instruments into real useful assets. All the while the public stands and stares in shock – watching their own somethings turn to nothing.